Taylor v. Sternberg

Background

A state chancery court in Arkansas appointed a receiver, Taylor, and his lawyer, Duty, to manage a local dry goods company in insolvency. About a month later a federal bankruptcy petition was filed and the corporation was adjudicated bankrupt. On the day of that adjudication the state court allowed $1,500 to the receiver and $500 to his lawyer. The receiver withheld those sums instead of turning them over to the federal bankruptcy trustee, and the trustee asked the bankruptcy court for a summary order to recover the money.

Reasoning

The central question was whether the bankruptcy court could summarily require turnover, or whether the receiver and his lawyer were adverse claimants needing a full lawsuit. The Court explained that when a bankruptcy petition is filed, control of the debtor’s property immediately passes to the bankruptcy court and the state court loses power over the estate. A receiver is an officer of the state court and thereafter holds property only for the bankruptcy court. Because the state court’s fee award was made after federal control attached, that award was void and the funds were subject to the bankruptcy court’s summary power; the lower courts’ rulings ordering turnover were therefore correct.

Real world impact

Trustees in bankruptcy can use summary proceedings to recover estate funds that a state court tried to award after a bankruptcy filing. State courts cannot enforce new fee awards made after federal bankruptcy control attaches. Receivers and their lawyers cannot retain estate money based on post-filing state orders when the federal bankruptcy court has assumed control.